Question

Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale—a cookbook, a travel guide, and a handy speller. Each book sells for $10. The publishing company’s most recent monthly income statement is shown below.

	Product Line
	Total Company				Cookbook				Travel Guide				Handy Speller
Sales	$	300,000			$	90,000			$	150,000			$	60,000
Expenses:
Printing costs		102,000				27,000				63,000				12,000
Advertising		36,000				13,500				19,500				3,000
General sales		18,000				5,400				9,000				3,600
Salaries		33,000				18,000				9,000				6,000
Equipment depreciation		9,000				3,000				3,000				3,000
Sales commissions		30,000				9,000				15,000				6,000
General administration		42,000				14,000				14,000				14,000
Warehouse rent		12,000				3,600				6,000				2,400
Depreciation—office facilities		3,000				1,000				1,000				1,000
Total expenses		285,000				94,500				139,500				51,000
Net operating income (loss)	$	15,000			$	(4,500	)			10,500			$	9,000

The following additional information is available:

1. Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales.
2. The same equipment is used to produce all three books, so the equipment depreciation expense has been allocated equally among the three product lines. An analysis of the company’s activities indicates that the equipment is used 30% of the time to produce cookbooks, 50% of the time to produce travel guides, and 20% of the time to produce handy spellers.
3. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 48,000 square feet of space, of which 7,200 square feet is used by the cookbook line, 24,000 square feet by the travel guide line, and 16,800 square feet by the handy speller line.
4. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars.
5. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines.
6. All other costs are traceable to the three product lines in the amounts shown on the income statement above.

The management of Diversified Products, Inc., is anxious to improve the publishing company’s 5% return on sales.

1. Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided.

Total Company Cookbook Travel Guide Handy Speller Sales $300,000 $90,000 $150,000 $60,000 Variable expenses: Printing cost 102,000 27,000 63,000 12,000 Sales commissions 30,000 9,000 15,000 6,000 ? ? ? ? ? Total variable expenses 132,000 36,000 78,000 18,000 Contribution margin 168,000 54,000 72,000 42,000 Traceable fixed expenses: Equipment depreciation 9,000 2,700 4,500 1,800 Warehouse rent 12,000 1,800 6,000 4,200 Advertising 36,000 13,500 19,500 3,000 Salaries 33,000 18,000 9,000 6,000 ? ? ? ? ? ? ? ? ? ? Total traceable fixed expenses Product line segment margin ? ? ? ? Common fixed expenses: ? ? ? ? ? ? ? ? Total common fixed expenses ? Net operating loss ?

Answer 1